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Cisco Faces Make-Or-Break Week For SDN

Cisco is counting on ACI, its software-defined networking strategy, to keep its hold on the enterprise infrastructure market. We'll see how that plays out this week at Cisco Live.

Following a year of shrinking revenue and profits, Cisco told investors on its quarterly financial earnings call last week that the company's recovery depends on its Application Centric Infrastructure strategy. This week, the Cisco Live US customer event takes place in San Francisco, and the signs are that Cisco will be announcing much more around ACI and SDN. It's now been six months since ACI was announced, and the public release of the first-generation product was promised by next month.

ACI is a big visionCisco ACI is not a single technology or product. The basic strategy is to use software applications to manage and operate networks in completely new ways. Cisco ACI product announcements started in November around using custom silicon in Nexus 9000 hardware. Since then, a string of announcements has shown that Cisco intends to extend ACI into many areas of the product portfolio. Announcements on UCS Director, security, and the WAN have already come out, and it seems reasonable to expect that the service provider business unit will make announcements in the near future.

SDN products have already disrupted networking, and Cisco came late to the realization. In many ways, ACI is catching up to competing strategies from VMware NSX and HP VAN. A thriving and expanding startup scene has also emerged to offer competing visions. Cisco is feeling competitive pressure.

Acceptance remains uncertainThe big question around ACI is that of customer acceptance. Customers that are holding back on Cisco are reluctant to speak publicly, but internal sources talk about significant pushback against ACI on the basis of proprietary technology, complexity, and high pricing.

Many organizations perceive that deploying ACI will create a dependency on Cisco technology, not just for routing and switching, but also for UCS servers, firewalls and IDS, and Invicta storage. Logically, this could also extend to other Cisco products such as unified communications -- although Microsoft Lync remains the dominant IP telephony platform in the enterprise.

The recent standards and open-source initiatives around OpFlex, OpenStack, and LISP can be seen as reaction to this criticism (although it also encourages third parties to write for the ACI platform). Many companies -- such as AT&T -- have been highly vocal in advocating that SDN must be open and interoperable to avoid vendor dependency.

An ACI ecosystem with 33 ecosystem partners leveraging the open approach and the policy model

1000+ customers in pipeline

175+ customers in its service provider, enterprise, and commercial divisions, with several in production deployments

Some critics make the point that Cisco has been promoting ACI to customers since mid–2013. Cisco has 75% market share, which makes these numbers seem low compared to the total number of addressable customers. And 33 ecosystem partners seems limited, when the opportunities for orchestration are so large. For example, consider Vnomic, a Cisco ACI partner that is providing application modeling to automate the deployment of SAP and HANA landscapes. This type of specific orchestration provides enormous opportunity.

On the other hand, slow uptake is to be expected because ACI is an early-stage technology, highly disruptive to IT operations, and the product is not yet shipping. The early-adopter model is well entrenched at Cisco to seed deployments for companies willing to take risks so that deployments are ready at launch. Cisco executives will, of course, assure you that they are pleased with the uptake and customer interest to date. The early marketing program has been as vigorous and comprehensive as Cisco can make it, and many customers are looking forward to ACI.

One final concern is purchase price. VMware NSX pricing has been widely criticized in recent months. This is in part because of its emphasis on rental licensing, but mostly because it is simply expensive and perceived as overpriced. Cisco is already known for high product pricing, but until actual ACI/APIC pricing is available, a proper evaluation cannot be made. Customers are looking to reduce their overall IT spend, and any attempt to increase top-line spending is likely to meet significant resistance.

Cisco financial strugglesCisco has had a few quarters of poor business with mixed outcomes in different business units. In the last two quarters alone, profits and revenue have dropped by 5% or more, with the gross profit margin now reduced to slightly more than 60%. Most financial news suggests that Cisco's share price has remained flat due to huge buybacks of shares. Cisco has announced a $10 billion share buyback, funded by debt raising in the US and backed by $30 billion net cash in offshore funds. (Head to page 2.)

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Network Computing

User Rank: Apprentice

Mon, 05/19/2014 - 11:58

Sanguine

I think Cisco's mission for Cisco Live is to psyche up the customers and tech bloggers who will be at the show. It has to generate some buzz among potential buyers and start greasing the runway to land sales of the Nexus 9K and (eventually) APIC.

That said, I'm sanguine that Cisco is going to survive this SDN shakeup in the enterprise market. It's got a deep customer base, and lots of network professionals who've invested a lot of time and money in getting Cisco certifications, and will likely be advocates within their own organizations for sticking with the one that brung them.

Cisco has been thwarting lower-priced competitors for ages. It's been accused of locking in customers for ages--and yet it still wins customers. Yes, SDN opens up a new front for competitors to come at Cisco, and competitors will likely peel away a percentage of Cisco's market share.

But there's also a huge cloud of uncertainty hovering over SDN. And that works to Cisco's advantage because it can play the role of Moses to its customer base, ready to lead them to the land of streamlined, automated, scalable, policy-driven operations.

And I don't mean to imply that Cisco's customers are blind followers. They aren't. But they have to evaluate the risk of SDN not delivering as promised. Do you jump into a boat you've never sailed before? Or stick with the one that's carried you this far already? I'm guessing the majority of enterprise customers will sail with Captain Chambers. (Apologies for the mixed metaphors)

I agree with your sentiment that Cisco has loyal customers and been able to retain revenue/profit for longer than expected.

What might be different this time is that Cisco is facing competitive pressure in all market segments - routing and switching is challenged by commoditisation, video conferencing is being undermined by google hangouts and skype video, service providers have new options for supplier and need new technologies, etc etc.

And financially, Cisco needs to maintain 60% gross margin to maintain its share price. New markets like Cisco UCS are at much lower profit margin. ACI might see lower hardware margins but higher margins on software.

Very interesting times! I wouldn't be surprised to see Cisco have to take a cut on its gross margins, and then get spanked hard by Wall Street. But that won't drive the company out of business (thought it might drive Chambers out of the CEO seat).

It will be quite interestng to watch it play out. I was actually surprised at how forgiving Wall St has been to the latest financial reports, given that the numbers were adjusted down a lot so that the earnings would look ok to begin with.

I agree -- and am hearing in talking to people here at Cisco Live -- that there is a large contingent of customers who will go with ACI becasue they already have so mch invested in Cisco and are comfortable working with the company and its technology. BUT, I do think they are losing a big chunk, and it's the higher, more lucrative end, where architects want to have more control. That's why the whole open networking movement is so big, right?

Interesting moment during media Q&A today with Chambers, when a reporter asked him about his successor. He didn't offer up any clues -- there are a number of good candidates, including Cisco President of Development & Sales Rob Lloyd, he said. Lloyd, for his part, refused to say anything. Oh, and Chambers looks to be in superb health. But he did allude to some transition news coming "next time you hear from me." He likened it to a parent wanting his kids to succeed.

For the amount of time Cisco has invested in you to help you understand what ACI is and isn't, you forever get it wrong. Cisco is not catching up to anyone with ACI, nor SDN for that matter. You financial information is wrong, your technical information is wrong, and your marketing info is what, wrong.

I genuinely enjoy talking to you and like our exchanges, but I know the outcome is always a negative slant to get headlines.

My recommendation is to go get a balanced view, by someone who also has a reputation of being tough on Cisco, Jim Duffy at Network World, who posted a very balanced view in the article below.

Thanks for chiming in here -- you bring up a recurring theme about customer loyalty vs misinformation.

I think comparing this article to the National Enquirer is quite a stretch, and as a long-time Cisco customer and user of their equipment, Greg is entitled to his opinion and to ask Cisco the hard questions that he and his peers need to find the answers to. None of us should just blindly accept what our vendors tell us when such large business and financial decisions are at stake.

I have a great deal of respect for Jim Duffy, but he is a journalist, not a technologist. So he is not qualified to judge the depths of Cisco gear the way Greg is, and Jim, as a reporter, should be more objective. Greg has a platform here because many people in the industry value his opinions and his courage to voice them.

It's great to be a tried and true Cisco fan. But if you love Cisco, IMHO, you should have your own good reasons for it -- not because they tell you to.

Being technical is no excuse for puposefully misinforming people. You want to be tough, be tough that is fair. I also know the difference between technical people and journalist having built data centers and networks for more than 25 years and with a CCIE and various other certs.

Greg and I have had direct exchanges on this and BS is BS. Journalist or rocket scientist, it all smells the same.

BS#1 - ACI is catching up to competing strategies from VMware NSX and HP VAN.

Response - ACI is providiing far more than NSX will ever be able to do and a 7 year old company that cannot show 20 customers with full features at scale, they are incomplete also as you have to plug it into something and buy hw gateways for vxlan and cannot do network virtualization for any platform, nor can they even do it for VSS, VDS, or any other edge other than the NSX vswitch. Greg knows better

BS#2 - Customers that are holding back on Cisco are reluctant to speak publicly, but internal sources talk about significant pushback against ACI on the basis of proprietary technology, complexity, and high pricing.

Response - This is pure BS, Greg has no idea on pricing, how open the platform is and the fact that we can not only existing on existing infrastructure but ACI can be extended over competitive infrastructure. Greg do your homework...

BS#3 - Many organizations perceive that deploying ACI will create a dependency on Cisco technology, not just for routing and switching, but also for UCS servers, firewalls and IDS, and Invicta storage.

Response - Customers can run python scripting, puppet, chef, openflow, and ACI, with NXOS mode or ACI mode. There is no dependency as Greg states - just another shovel full

BS#4 - Some critics make the point that Cisco has been promoting ACI to customers since mid–2013. Cisco has 75% market share, which makes these numbers seem low compared to the total number of addressable customers.

Response - This is a clear indication to me that the author knows nothing about taking a product to market. Maybe we should be a 7 year old, agile software company, who cannot produce 20 referenceable customers at full features and scale. Amazingly poor understanding of a market

BS#5 - On the other hand, slow uptake is to be expected because ACI is an early-stage technology, highly disruptive to IT operations, and the product is not yet shipping.

Response - Complete mis-information. Greg has no idea what customers we have in production, it is not highly disruptive - maybe I should put a SDN LAN emulation model in place that forces me to have a bunch of x86 appliances recreating ATM LAN Emulation on x86, terrible traffic flows, having to build a separate network for management, vmotion - live migration, controllers, and have low scale, force a bunch of NAT domains, and oh, by the way, force to rip out ever vswitch, upgrade every vswitch from the new system to fix lousy performance of OVS, and not be able to accomodate any other platform because VMware is locking everyone out of the kernel.

BS#6 - The early-adopter model is well entrenched at Cisco to seed deployments for companies willing to take risks so that deployments are ready at launch. Cisco executives will, of course, assure you that they are pleased with the uptake and customer interest to date. The early marketing program has been as vigorous and comprehensive as Cisco can make it, and many customers are looking forward to ACI.

Response - Not sure what to say here other than your writer needs to put on an orange wig, red nose, and floppy shoes.

BS#7 - One final concern is purchase price. VMware NSX pricing has been widely criticized in recent months. This is in part because of its emphasis on rental licensing, but mostly because it is simply expensive and perceived as overpriced. Cisco is already known for high product pricing, but until actual ACI/APIC pricing is available, a proper evaluation cannot be made. Customers are looking to reduce their overall IT spend, and any attempt to increase top-line spending is likely to meet significant resistance.

Response - Do your homework Greg, others have and you clearly have not.

BS#8 - Cisco has had a few quarters of poor business with mixed outcomes in different business units. In the last two quarters alone, profits and revenue have dropped by 5% or more, with the gross profit margin now reduced to slightly more than 60%. Most financial news suggests that Cisco's share price has remained flat due to huge buybacks of shares. Cisco has announced a $10 billion share buyback, funded by debt raising in the US and backed by $30 billion net cash in offshore funds.

Response - Not only do you mis-reprsent technical data, you have no clear idea on how to do financial analyst.

Final comments - I realize after writing this that I am the fool for validating this comic book of pseudo-networking BS.

Thanks for your response, that's interesting to read. Again, I need to stress that Greg is giving his opinion from the customer viewpoint. Customers will also have no knowledge about "taking a product to market" nor will they care about the details of that. They want to know this is going to work for them, and they may not want to have to learn all the extra skills to make it work well.

If you have real live customers using ACI, feel free to point them here and tell us about their experience. The market (and our readers) needs to hear directly from them to validate ACI. I heard a lot of them talking at Cisco Live -- if they can get out in a more public forum, that would be great.

It is easier to hide behind.... "the customer said" any bad journalist can say that. Good journalists have validation - not conjecture that can be present on any slide or bad blog message.

Customers know best how to take a product to market - they have to install it... If customers are your source, and an engineer is writing the blog who is not an expert at go to market - then how credible is your opinion. In my view 0. Leveraging a big name like network computing as a platform makes it all the more important to be credible. In other words, if you don't know - don't FUD.

This is my last blog post here and my recommendation moving forward to customers, resources, and internal, is to drop this platform to a lower tier from credibility to variable rhetoric

Yes, check my profile on LinkedIn. I am Frank D'Agostino, Senior Director at Cisco Systems who is responsible for product development and technical go to market for Application Centric Infrastructure (ACI), the Nexus 9000, and the Application Virtual Switch.

I was also formerly the VP of WW Technical Operations at Nicira Networks and left prior to the acquisition of Nicira by VMware because I knew ACI was going to go far beyond where SDN LAN Emulation - this decade's version of ATM LAN Emulation on x86, was going to end up.

Not trying to hide my profile, just try to spend as little time on worthless blogs as possible, except when the company makes significant investments trying to educate someone who puposefully twists information and misinforms the public community.

I'd like to reiterate again that the article written here by Greg Ferro is based on his professional opinion as an independent blogger. Network Computing welcomes differing and conflicting opinions and our goal is to foster a lively discussion, but we ask you to refrain from ever insulting any contributor or member of the community. Please take the high road whenever possible.

"Cisco is counting on ACI, its software-defined networking strategy, to keep its hold on the enterprise infrastructure market."

This, surely, rings true even if one disagrees with the analysis that follows. ACI and related technologies do appear to be core to Cisco's next generation networking platform. If the Nexus 9k with full ACI hardware in is (ASICs and all) is successful, they'll be in a very strong position to lead the data center market. If ACI isn't seen to bring benefits, or to fail to live up to its potential (the hype?) then it's going to be a very tough sell indeed, in an increasingly competitive market.